Why I don't believe today's productivity stats
Posted by: Michael Mandel on May 07
Today the BLS put out a report saying that nonfarm productivity rose by 1.8% over the past year, and at an 0.8% rate in the first quarter of 2009.
To be blunt, I don’t believe these numbers. There are two reasons, both of which I have written about in the past.
*First, the productivity statistics don’t pick up drops in intangible investments such as R&D, advertising and marketing. For example, if companies are cutting back on R&D and firing all their scientists and technologists, that will show up as a drop in work-hours but not as a drop in output. Hence, it will look like an increase in productivity—but it’s really just us eating our seed corn.
Or to use an example that hits closer to home: Advertising. Advertising is not measured as part of output (it does not show up directly in either personal consumption or business investment). Therefore a plunge in advertising, like we are experiencing today, does not show up as a decline in output—but it does lead to a lot of my journalist friends being laid off. Poof! An apparent increase in productivity.
*Second—as I have written before, the productivity statistics are being distorted by mismeasurements of real imports. In fact, in areas like furniture, electronics, and autos, the government statisticians are overestimating the drop in imports, adjusted for inflation.
Why does this matter? Because you may not realize, for most of the economy the government has no direct way of measuring production. Instead, the statisticians measure how much people and companies are buying, and then subtract out imports. For example, retail stores report furniture purchases, and importers report imports of furniture from China and elsewhere. Then by subtracting imports from consumption, the difference is production.
The problem is that all of this has to be adjusted for inflation, and there are some real problems with the import price statistics. I am going to follow up with an extended explanation—too wonky here—but it tends to make the growth of production look higher than it is."